811.512356 Double/11
The Netherland Minister (Van Haersma de With) to the Secretary of State
Sir: Reverting to Your Excellency’s letter of January 26, 1935, No. 811.512356/Double/5, on the subject of an arrangement between the Netherlands and Netherlands Indies Government on the one part and the Government of the United States of America on the other part for the prevention of double taxation, I have the honor to transmit to Your Excellency some observations of the Netherlands Minister of Finance to the following effect:
The resolution of the Minister of Finance of April 17, 1928 (Official Gazette No. 76) and the ordinance of May 5, 1934 (Indian Official Gazette No. 921) are both applicable to salaries, wages or other remunerations for services which are not paid out of the treasury of a foreign public body. In pursuance of the above regulations exemption from Netherlands or Netherlands Indies taxation respectively can i. a. be claimed for such part of the income as results from an occupation or trade carried on abroad. This part of the income represents salaries, wages and other remunerations.
The above regulations also include revenue from mortgages: as they explicitly mention income from debts secured on real estate situated abroad.
Americans residing in the Netherlands or the Netherlands Indies are therefore, on condition of reciprocity, exempt from State income tax on revenues derived from:
- a)
- real estate situated outside the Netherlands or the Netherlands Indies;
- b)
- debts secured on real estate situated outside the Netherlands or the Netherlands Indies;
- c)
- industrial enterprises or trade carried on outside the Netherlands or the Netherlands Indies;
- d)
- trades or occupations carried on outside the Netherlands or Netherlands Indies;
- e)
- offices the salaries for which are paid out of the treasury of a foreign public body;
- f)
- pensions or allowances of half pay provided out of the treasury of a foreign public body.
The above proves that, at any rate so far as the above types of income are concerned, the Netherlands and the Netherlands Indies grant American citizens domiciled in those countries an exemption similar to that which the American law holds out to Netherlander domiciled in the United States.
It is true that the resolution of the Minister of Finance of April 17, 1928 (and, following this resolution’s example, the ordinance of March 5, 1934) does not enumerate:
- 1)
- pensions not paid out of the treasury of a foreign public body;
- 2)
- interest accrued on debts, bonds and other interest bearing obligations;
- 3)
- dividends on shares in companies and corporations;
- 4)
- royalties;
- 5)
- profits resulting from the sale of real and personal property.
But on the other hand, non-residents of the Netherlands who derive revenue of the above types from the Netherlands are not subject to the payment of Netherland income tax, unless the revenue results from an industrial enterprise, trade or occupation carried on by those non-residents in the Netherlands or—and this concerns royalties only—if and in so far the revenue consists in a share in the profits of an industrial enterprise, trade or occupation which is established in the Netherlands.
If the revenue in question did not result from an industrial enterprise, trade or occupation carried on in the Netherlands or—so far as royalties are concerned—does not consist in a share in the profits of an industrial enterprise, trade or occupation which is established in the Netherlands, residents of the United States who obtain such types of revenue from the Netherlands are not liable to taxation in the Netherlands, so that the American Treasury will not have to allow a credit on the American income tax by virtue of Section 131 (a) of the Revenue Act of 1934.
If the revenues in question are to be considered as the result from an industrial enterprise, a trade or occupation carried on in the Netherlands or—where royalties are concerned—as to consist in a share in the profits of an industrial enterprise, trade or occupation which is established in the Netherlands, the persons concerned, although domiciled abroad, (f. i. in the United States) are subject to Netherlands [Page 612] taxes and those domiciled in the United States can claim a credit pursuant to the provisions of the above mentioned Section 131 (a)–3. On the other hand American citizens domiciled in the Netherlands who derive similar income from the United States, are entitled to a reduction on the Netherlands taxes by virtue of the above mentioned resolution of April 17, 1928, in case the income is derived from an industrial enterprise, trade, or occupation carried on in the United States or—so far as royalties are concerned—it consists in a share in the profits of an industrial enterprise, trade or occupation which is established in the United States.
That persons not domiciled in the Netherlands are not subject to taxation in the Netherlands on pensions payable by residents of the Netherlands (other than Netherland public bodies), on interest accrued on debts, bonds or other interest bearing obligations of residents of the Netherlands, on dividends on shares in companies or corporations established in the Netherlands and on royalties (unless such income results from an industrial enterprise, trade or occupation carried on in the Netherlands or—as far as royalties are concerned—from a share in the profits of an industrial enterprise, trade or occupation which is established in the Netherlands) is explained by the fact that the principle underlying the Netherland Income Tax Law is that income of this character should be taxed in the country where the recipient is domiciled. This principle also results in the fact that persons domiciled in the Netherlands are subject to Netherland taxation on similar income derived from abroad and that (if such income did not proceed from an industrial enterprise, trade or occupation carried on abroad or—so far as royalties are concerned—does not consist in a share in the profits of an industrial enterprise, trade or occupation which is established abroad) no reduction is allowed on the ground that this income is also subject to taxation in a foreign country.
The Netherland law is also based on the principle that profits resulting from the sale of real or personal estate, in the event the sale does not take place in the regular exercise of a line of business or occupation or the profits cannot be considered as proceeding from the performance of a special service, are no part of the income but constitute an increase of capital and it would be absurd to allow a reduction of income taxes in the Netherlands with regard to revenues which are not regarded as “income” in that country.
To summarize: double taxation is avoided by the system prevailing in the Netherlands in either of two ways:
- 1)
- as regards residents of the Netherlands by allowing reduction on State income tax for income which from its very nature should be taxed in the country of origin (the types of income mentioned above under (a) to (f) inclusive);
- 2)
- as regards non-residents of the Netherlands by exempting revenues which from their very nature should be taxed in the country in which the recipient is domiciled (the revenues enumerated above under 1 to 4 inclusive, so far as they do not proceed from an industrial enterprise, trade or occupation carried on by the recipient, or—so far as royalties are concerned—do not consist in a share in the profits of an industrial enterprise, trade or occupation.)
The Netherland system is calculated to prevent double taxation to a great extent. Where respecting certain types of income this double levy yet occurs, this is attributable to the circumstance that the Netherlands and foreign tax legislation concerned are predicated on different principles; e. g. the tax laws of the United States which subject non-residents enjoying income as above enumerated under 1 to 4 inclusive to the payment of income tax. I consider it, however, very doubtful whether the United States Government in the mere fact that double taxation is possible in certain cases shall find just cause for deciding that the system of taxation prevailing in the Netherlands in no way satisfies the requirements contained in Section 131 (a), 3, of the Revenue Act of 1934.
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